How Does the US Tax System Work?

If you are moving to the US to work then you will be subject to tax. Collection of these taxes is done by the Internal Revenue Service which is part of the US government Treasury Dept. States may levy their own charges which we’ll touch upon later.

US Income Tax

The US tax year runs from 1 January to 31 December and all income tax returns (Form 1040) must be returned before April 15. How much tax you pay depends to a large extent on whether you are classed as a US resident or not. Permanent US residents have to pay a percentage of their worldwide income whereas non-permanent residents only pay tax on what they earn in the US. So if you live in the US but are paid via the UK then you don’t pay any US income tax but will still be stung for UK income tax which can be considerably higher. If you work in the UK and the US and want to avoid paying taxes twice, visit the Social Security Administration website.

The tax threshold in the US is much lower at $3,500 a year but you can also claim a standard deduction. This is (from 2011) $5,800 for single or married people filing their returns separately; $11,600 if you are filing jointly or are widowed with a dependant and $8,500 if you are the head of the household, that is the sole breadwinner. There are other itemised deductions such as contributions to charities and mortgage interest that you can claim. More information on this and how to pay online is at the IRS website.

Some states will impose taxes at a gradual rate depending on what you earn whilst others have a flat rate for all taxes. Usually rates are between 10-35%. Employees may also be eligible for withholding taxes at a rate set by the government based on an estimate of your final tax liability.

Social Security Tax

Social security tax in the US goes towards social welfare and social insurance such as Medicare. The taxes are generally taken out of payrolls through the Federal Insurance Contributions Act (FICA) and are roughly around 4.2% of your gross wage, with your employer paying 6.2% (at 2011) but in the past the employee and employer have paid half each. Self employed people have to pay the full amount. Medicare then takes an additional 2.90% which is spread between employer and employee.

State Taxes

As with the council tax in the UK, some US states impose their own taxes. Most claim state income tax on corporations whilst 43 states also ask for individual taxes. The states who do not charge individual income tax are; Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Those who do charge, levy around 10%, although this can vary hugely.


The US does not charge VAT although some states will charge between 5% and 10% on the sale of goods, apart from Alaska, Delaware, Montana, New Hampshire and Oregon.

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